10 Steps CEOs can Take to Stop Activists Forcing them into M&A

The number of activist investor deals pushed by the likes of Carl Icahn are rising, putting boards on the defensive.

Whether they like it or not, more CEOs are sizing up acquisition or divestment opportunities. And the rise of activist investors is largely to blame.

The world’s biggest mining company, BHP Billiton, is a current-high profile target. Others include American Insurance Group, Ericsson and Buffalo Wings.

Previous investigations have indicated that the influence of corporate rabble-rousers—such as Icahn Enterprises, Elliot Management and Starboard Value—has been growing, as shareholders lost patience with low returns and conservative management calls in the wake of the financial crisis.

Now, an analysis by research group Activist Insight shows just how much their ascendancy has has rippled through M&A markets.

“What we try to do is find a good quality business that is also under-managed,” Arnaud Ajdler, managing partner, Engine Capital

M&A-related activist demands at U.S. publicly-listed companies numbered 147 last year, down slightly from 151 in 2014 but well up on 115 in 2014 and 92 in 2013.

On average, 47% of demands since 2010 have been for targets to either sell themselves or merge with another company.

“What we try to do is find a good quality business that is also under-managed,” Arnaud Ajdler, managing partner at Engine Capital, said. “We then approach the board and say, ‘fix yourself in the public markets or sell yourself.’ Either is fine with us.”

A further 22% of demands were to oppose M&A deals favored by the board, 17% were to split the company and 14% marked an activist takeover bid.

Activist Insights has 10 tips for boards, fearful of being targeted:

1. Prepare by viewing proposed deals through shareholders’ eyes, looking for weaknesses in activists’ ideas.

2. Monitor trading activity, assessing how the deal will impact the goals of stock acquirers.

3. Take the temperature of your shareholders when deals are flagged.

4. Assess how the activist’s objective will resonate with other shareholders.

5. Consider a settlement or confidentiality agreement.

6. Emphasize the strength of your strategic review process to investors.

7. Explain the strategy and risk associated with alternative courses of action.

8. Prepare to engage with proxy advisers, ensuring your valuation assumptions are based on solid ground.

9. Respect the views of equity analysts.

10. Clearly “show and tell” how a deal is good or bad

No matter how well boards react, activism has well and truly taken root in America and increasingly around the world.

“Whatever the precise form, M&A activism looks likely to persist,” the report’s authors said. “It can be relatively cheap … and lucrative.”


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